Corp Comm water and wastewater plan falls short

All eyes seem to be focused on the Corporation Commissioners and their supposed sell out to APS or its parent Pinnacle West. At the same time, taking a back seat with the media is another huge water/wastewater issue.

The commissioners have come up with a plan to theoretically solve the ongoing problem of a large number of small, underfunded and underperforming water and wastewater companies that have plagued the state’s ratepayers’ ability to receive a consistent and satisfactory supply of water and/or wastewater.

Greg Eisert

The problem is the “plan” falls short from solving the “ongoing” problems. Currently the “plan” only targets one company and the majority of its ratepayers with the burden of subsidizing the commissioners’ current solution.

The commissioners rightfully have set up a Small Water System Ombudsman Office to assist the State’s Class D & E water and wastewater companies with various processes, financing and planning issues.

The commissioners have also made it clear that their expectation is for the Larger A B & C water and wastewater companies to purchase a number of these smaller (D & E) companies. Such purchases would begin the process of re-organizing and updating infrastructures to appropriately service the ratepayers of the small underperforming companies to satisfactory levels.

Of course, such purchases would be likely to transpire at a premium. There are currently no provisions requiring a sale of one of these companies to not exceed their current infrastructure value, regardless of their ability to properly service the customer. Therefore, the purchasing company may pay well beyond the true value of the smaller underperforming company.

The commission has set up incentives available for the possible purchasing company to act as enticements. The problem is, prior to the large infusion of cost to get the infrastructure up to speed, along with paying a premium for the troubled company, huge cost burden would shift to the ratepayers of the purchasing company. This is true especially if the larger company or companies purchase numerous companies over a short period of time.

Another major issue, is the commissioners fail to close the problematic loop of continued development of small, under-capitalized companies going forward. This concern inadvertently perpetuates the initiation of hardships on ratepayers of the larger water and wastewater companies engaged in the purchase scheme across the state.

To properly move forward with a sustainable solution workable by all involved stakeholders, the commission has to complete and close the loopholes which will include a more feasible restricted (premium pay) transaction base, along with legislation to close the opportunity for continued development of these small (too small) companies, which are not initially tied to an existing utility. The commission would also have to order all water/wastewater class A B & C companies with multiple districts to consolidate their districts to form a single-point price scheme.

In its exuberance to initiate interest by the larger companies to begin down the path of purchasing, the commissioners seem to be promoting the concept of consolidating ratepayer districts within companies into a single-point price scheme by ratepayer classification. This is problematic in that the effect will be to punitively place the burden of large cost shifts from the smaller development/communities to the larger lower cost areas. This will be further exacerbated on a perpetual basis unless the above mentioned loop is closed. Without solving the continued ability to develop small non-contiguous systems the re-configured larger utilities would continue down the path of incentivized purchases, which would provide their ratepayers with burdensome cost shifts in perpetuity. Some subsidy to help our neighbors is commendable. Unbridled subsidy is something else!

Another interesting tidbit is how quiet RUCO has been regarding these issues. RUCO is championed by the governor to be “the protector of the ratepayer.” RUCO has been the defender of the steadfast “cost causer” principle of ratemaking. So far, all we have heard is “silence” concerning this supposed move toward a socialized, highly subsidized base marketing system. Sometimes, silence is “not” golden. We need our champion to continue standing strong against such a shift.

Currently, the commission has only ordered EPCOR Water to establish a scenario to consolidate all its districts. This program, if put into effect, would cause a cost shift from its largest group of ratepayers (45%), to the tune of an 85% rate increase for the benefit of the rest, of up to a 47% rate reduction. This changes the formulation of ratemaking from a cost-based structure to a socialized, marketing, single-point pricing scheme – great for the acquiring utility, bad for the ratepayer in general.

The commission has also ordered EPCOR Water to file another rate case no later than 2018 (EPCOR plans to file in 2017) and must include an analysis for consolidation of its water districts. Such a consolidation would cause 36% of the ratepayers with the lowest median incomes ($36K – $46K) to subsidize the ratepayer base with the highest median incomes ($50K – $126K). It doesn’t take a rocket scientist to figure what’s coming down the tracks. It’s akin to socialized medicine with the potential to be worse.

For more than 100 years, cost-of-service regulation has been the fundamental basis for setting rates for regulated utilities. The premise being that the government must assert the right to oversee the prices charged to ensure that those services were/are provided to the public in a reasonable manner.

The other component of ratemaking is rate design. The rate design for each district rate class should reflect the costs and revenue requirements identified in the cost-of-service study as closely as possible. Subsidies should be avoided, and at least should be limited and transparent. Forcing the move from the current, historically proven system to a single-point marketing structure greatly exceeds any positive potentials for most customers.

If the scheme works for the current EPCOR case, you can be assured it won’t be long before you will be next on the list.

Greg Eisert is director and chairman of government affairs for the Sun City Home Owners Association.

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